ACC2708 CORPORATE ACCOUNTING 2 Onerous contracts: Non-cash A/Equity: measured at FV Lease rec. = PV of pmts + PV of GRV/UGRV
CURRENT LIABILITIES (CL): <12mths/norm op cycle Expected costs = LOWER OF 1. Costs to fulfil contract 2. Carrying amt of payable > FV of A/E = Gain Finance lease:
NON-CURRENT (NCL) IF: refinanced from another LT debt, Compensation/penalties Carrying amt of pay < FV of A/E = Loss Derecognise A + Accrue interest rev
convert into ord shares, unconditional right to defer > 12 Restructuring provision: **note that there’s 2 aspects here. The CV of the debt & Don’t need recognise depreciation (A not in books)
mths Detailed plan + valid expectation to inform Asset/E (gd in exchange) UGRV: minus PV of UGRV from sales rev & COGS
A/P Buy on credit Creditor (BH) → measure @ FV If RV end of term < exp: lessor bear the loss
Dr Expense Cr A/P Contingency A Debtor (BW) → Gain/Loss = Carrying amt of debt – FV of A/E
Dr A/P Cr Cash If pmt at beginning → need accrue int income @ EOY
N/P ST/LT LEASES 1Jan: Dr Cash Cr LR | 31 Dec: Dr LR Cr Int income
Int /non-int bearing LESSEE POV
Div Pay Undeclared → not liability CAPITALISE all leases → substantial control over A | Dr ROU Operating lease:
Stock div → EQUITY A Cr Lease liability Continue to recognise A in books + depreciate A + lease rev
DON’T OVERSTT A.
Employee Dr Exp Cr Payables Cr Cash Except: (straight line)
related Employer share & employee share Contingency L
- Less than one yr / Less than $5,000 → expensed Dr Cash Cr Unearned rev
liabilities Bonus: op exp. If unpaid: L
when incurred If is UGRV → dep expense: don’t minus RV
Provisions: (CL/NCL)
Recognise interest (effective int method) & depreciation Dr Dep exp Cr Acc dep
1. Legal/Constructive PO
expense Dr Dep exp Cr ROU A
2. Probable outflow of resources
Dr Int expense Dr LL Cr Cash
3. Reliable estimated NON-CURRENT LIABILITES (NCL): BONDS - Never purchase (GRV) → dep over lease term +
Legal PO: legally binding Principal amt + periodic interest don’t minus RV (RV belongs to lessor)
Constructive: established pattern due to past events; valid CR > i/r = PREMIUM - Purchase (BPO) → dep over useful life
expectation CR = i/r = PAR Bargain renewal/purchase option (BRO/BPO): substantial
Recognise BEST ESTIMATE to settle PO Executory costs:
CR < i/r = DISCOUNT diff bet renewal rental and expected fair rental →
+ factor in TVM Fixed → incl in lease pmts (LL)
reasonably certain will extend lease term/purchase
• Expected value Var → expensed as incurred (don’t incl)
Effective interest method: Lease pmts = Fixed + Var + guaranteed RV + bargain
• Midpoint in range (range of prices) Direct costs (incremental):
Discount/Premium on bond pay = Face value – PV of bond t purchase option
• Most likely outcome (lawsuits) [LESSEE] incl in ROU A; not in LL (pay to 3rd parties)
= 0 (what you actually get) Use: 1. Implicit i/r 2. Incremental borrowing rate
Extensive disclosure required. Guaranteed RV:
- Description, timing of outflow, uncertainty in If lesser than expected:
outflow, expected reimbursements
• Predict at start: incl add pmt into lease pmt [LESSOR] Operating: defer (amortise over lease term) |
DON’T record general risk contingencies.
• Realised term end: Dr RV loss on lease Finance: expense at pt/period of sale
Litigation: look @ → period of occurrence, prob of unfav
outcome, reasonable & reliable estimate of loss Sales leaseback
If unfiled → prob of filing & prob of unfav outcome (BOTH) SELLER = LESSEE (recognise gain/loss = FV - BV)
Dr Lawsuit loss Cr Lawsuit liability BUYER = LESSOR
*NOT PROBABLE = DON’T RECORD Successful sale: control passed to buyer (lessor) →
Dr Cash Cr Bond payable OPERATING lease (seller no more ctrl)
Warranty provisions: Dr Int exp Dr Bond pay Cr Cash - Seller derecog A + recog gain/loss (sell P/FV – BV)
Assurance: expensed @ pt. of sale Dr Int exp Cr Bond pay Cr Int pay (Accrual) - Dr Cash Dr Acc dep Cr Asset Cr Gain
MATCHING PRINCIPLE: expensed in SAME PERIOD as Bond issued bet int dates: - Lessee Dr ROU A Cr LL
revenue generated Bondholders pay from last pmt date to issue Failed sale: control still w seller → FINANCING
Dr warranty expense Cr Cash/Inv/Payroll Dr Cash Cr Int expense (prorate amt) Dr Cash Cr Note payable
Dr warranty expense Cr warranty liability Bond writer pay full pmt on nxt pmt date 1. Determine type of lease (fin/op)
Service type/Extended: Cr Unearned rev 2. Determine type of sale (success/fail)
Rec. on straight line basis/overtime
Warranty costs → expensed as incurred TAXES
*don’t need record estimated liability! Fin books: accrual basis | Tax code: cash basis
Consideration Payable Temp diff: appear in both books; reverses
Premiums, coupons, rebates → stimulate sales Perm diff: appear in one book; non
Costs expensed in period of sale LESSOR POV
Taxable (minus) /deductible (add back)
Premium expense = selling expense Classify: FINANCE (essentially a sale) or OPERATING
L = Estimated costs – costs of alr redeemed 1/5 + Non-cancellable = FINANCE lease
Deferred Tax Liability (DTL):
Environmental Provisions: legal obligation to return long live Extinguishment of NCL: 1. Transfer ownership test
Pre-tax book I > Taxable I
asset Reacq. P > NBV = Loss (paying more) 2. Purchase option test
Tax expense > Tax payable
Amt = BEST ESTIMATE of future costs (PV) Reacq. P < NBV = Gain (paying less) 3. Lease term (>75%)
Pay LESS tax today, MORE in future
Recog any gains & losses at the end - Bond must be amortised up to reacq date (similar 4. PV test (>90%) *don’t incl UGRV
DTL bal = future taxable I (temp diff)* tax rate
to dep.) 5. (no) Alternative use test
, Dr Tax exp Cr Tax pay Cr DTL *Liability → 16A-D → Equity
DTA & DTL → non-current on B/S - right to redeem bc of A. uncertain event Treasury shares: cannot rec gain/loss (embedded in equity)
Deferred Tax Asset (DTA): NET DTA = DTA – DTL | NET DTL = DTA – DTL occurred or B. death/retirement of holder | Set off amt → reduce credit exposure
Taxable I > Pre-tax book I issuer give prorated shares bc liquidation Conditions: 1. Legal enforceable right to set off
Tax payable > Tax expense *distribution = dividends (not finance costs) 2. settle on a net basis (realised A & settle L simultaneously)
Pay MORE tax today, LESS in future 3. Not puttable pref shares/bonds, rights, options,
Only record if probable to realise DTA (don’t overstate A) warrants, share options (fixed no. @ fixed P) Equity’s distributions/gain/loss/transn costs/changes in FV
Income tax expense = deferred + current
Dr Tax exp Dr DTA Cr Tax pay Obligation: Type: → WILL NEVER HIT P&L
Deferred tax exp = CHANGE in DTL/DTA (??)
If DTA not realisable (EV @ end of period) → Dr Tax exp Cr Goods + svcs Non-financial L
Net deferred tax exp = (DTA) + DTL
DTA Cash + Fin asset Financial L FA + ED Same as FA (ENTIRE). No split acct.
Change in tax rate → adjust in period of change (record adj Issue equity/own VAR no. → L FL + ED Split acct
Others:
in DTL) shares (VAR FOR VAR/VAR FOR
Pmts based on price index (VAR) → not incl in LL
FIXED/FIXED FOR VAR)
If pmt at 31 Dec → don’t have to accrue for int exp & liability
FIXED no. → E FIN FVTPL (except hedge acc)
Sales rev: PV of lease pmts (exclude RV) DERIVATIVE
(FIXED FOR FIXED)
Non-deriv contract:
BEG bal of LL & LR: (calc yrself) Fixed no. of shares Week 8:
LL (lessee) = PV of lease pmts + PV of $ owed under RV Dr Legal exp Cr Share capt FA FL
(expected – guaranteed RV) Deriv contract: AC FVOCI FVTPL AC FVTPL
LR = PV of lease pmts + PV of un/guaranteed RV Fixed no. of shares @ fixed
exercise P Financial derivatives: Forwards/Swaps/Futures/Options.
Expected RV < Guaranteed RV → lessee need pay lessor the Dr Cash Cr Reserve
Held for trading. @ FVTPL. (EXCEPT: hedge acc → FVOCI)
balance
Net operating loss (NOL): Ded. tax expense > Taxable rev Forwards Agreed rate on agreed i/r, fx
If is unguaranteed RV → lessor bear the loss amount @ specified
Carry forward: offset future tax
future date
@ Loss incurred → record benefits Historical eff rate = coupon rate OTC | Gross or Net basis
Dr DTA (benefits for future tax earnings) Mkt based borrowing rate = i/r → NDF
Cr Tax expense (loss c/f – CONTRA acc) Swaps Pays int @ pre-agreed i/r, fx, credit
Bonds: BA2+ END mode fixed rate to & receives default
Leases: depending on qn pay on 1Jan/31Dec int @ prevailing floating swaps, equity
rate swaps
Estimated redemptions – redemptions to date = remaining
redemptions (liabilities) No exchange of
@ Nxt yr → realises benefits
principal; same amt;
Dr Tax expense same currency
Cr DTA (reduce bal. to 0) Accrual of interest: Dr Int exp Dr Bond/Int payable Cr Cash
Futures Exchange i/r, fx,
Cr Tax payable Compound instruments: *SPLIT ACCT commodity
Week 7: Financial liability & equity Step 1 LIABILITY: Initial: PV (int + principal pmts); using EIR
Options i/r, fx, equity
Asset Liability b4 issue exp | Subsequent: AC options
FA: cash/equivalents, FL: contractual obligations Step 2 EQUITY: residual (Face val – FV(liability)) Value depends on underlying asset, no initial net
equity instrument held, to pay cash/exchange fin
Step 3 Allocate issue exp proportionately investment/smaller than required/settled at future date
contractual rights to items (DERIVS)
Step 4 Find EIR w expenses (FV: use bond faceval) - Underlying var: int/currency/price of
receive cash, contractual
rights to exchange fin stock/commodity/index/credit rating/non-fin var
items (DERIVS) Dr Cash Cr Bond pay Cr Capital reserve Favourable: FA | Unfavourable: FL
- Valued by Dr Bond pay Dr Capital reserve Cr Cash Hybrid: non-deriv host contract (FA/NFA/FL/NFL) + ED (>=1)
markets If FD contractually transferable independent of
NFA: inv, PPE, prepmts, NFL: unearned rev, Dr Cash Dr Unamortised disc Cr Bond pay Cr Capital reserve instrument/diff counterparty → separate FD (not ED)
patents, trademarks provisions
- Valued by Unamortised disc/prem = Face val of bond – Amortised costs
DTA = NOL * tax rate - tangible AKA carrying val of bond @end\
-
Deferred income tax benefit features = int exp – cash paid
Reduce net loss - Gearing ratios: debt ratio more intuitive (D/D+E) Early redemption of bond
-
Don’t recognise DTA if NOT probable & not Higher ratio/more leveraged → higher fin risk Step 1 Allocate cash paid (redemption expenses)
reliably estimated If L misclassified as E → ratio understated proportionately
Carry backward: c/b 2 yrs (earlier yr first) → receive Equity: Step 2 Rec gain/loss (L) → P&L Rec. of FA ACCOUNTING CHOICE:
refunds. c/f remaining. 1. Non-puttable ord shares Step 3 Rec gain/loss (E) → Equity 1. Trade date: date of contract (FV=0)
Dr Income tax refund rec. 2. Puttable fin item (meets req in 16A,B,C,D) *issue expenses and redemption expenses → PROPORTION
Cr Income tax expense (CONTRA acc)
CURRENT LIABILITIES (CL): <12mths/norm op cycle Expected costs = LOWER OF 1. Costs to fulfil contract 2. Carrying amt of payable > FV of A/E = Gain Finance lease:
NON-CURRENT (NCL) IF: refinanced from another LT debt, Compensation/penalties Carrying amt of pay < FV of A/E = Loss Derecognise A + Accrue interest rev
convert into ord shares, unconditional right to defer > 12 Restructuring provision: **note that there’s 2 aspects here. The CV of the debt & Don’t need recognise depreciation (A not in books)
mths Detailed plan + valid expectation to inform Asset/E (gd in exchange) UGRV: minus PV of UGRV from sales rev & COGS
A/P Buy on credit Creditor (BH) → measure @ FV If RV end of term < exp: lessor bear the loss
Dr Expense Cr A/P Contingency A Debtor (BW) → Gain/Loss = Carrying amt of debt – FV of A/E
Dr A/P Cr Cash If pmt at beginning → need accrue int income @ EOY
N/P ST/LT LEASES 1Jan: Dr Cash Cr LR | 31 Dec: Dr LR Cr Int income
Int /non-int bearing LESSEE POV
Div Pay Undeclared → not liability CAPITALISE all leases → substantial control over A | Dr ROU Operating lease:
Stock div → EQUITY A Cr Lease liability Continue to recognise A in books + depreciate A + lease rev
DON’T OVERSTT A.
Employee Dr Exp Cr Payables Cr Cash Except: (straight line)
related Employer share & employee share Contingency L
- Less than one yr / Less than $5,000 → expensed Dr Cash Cr Unearned rev
liabilities Bonus: op exp. If unpaid: L
when incurred If is UGRV → dep expense: don’t minus RV
Provisions: (CL/NCL)
Recognise interest (effective int method) & depreciation Dr Dep exp Cr Acc dep
1. Legal/Constructive PO
expense Dr Dep exp Cr ROU A
2. Probable outflow of resources
Dr Int expense Dr LL Cr Cash
3. Reliable estimated NON-CURRENT LIABILITES (NCL): BONDS - Never purchase (GRV) → dep over lease term +
Legal PO: legally binding Principal amt + periodic interest don’t minus RV (RV belongs to lessor)
Constructive: established pattern due to past events; valid CR > i/r = PREMIUM - Purchase (BPO) → dep over useful life
expectation CR = i/r = PAR Bargain renewal/purchase option (BRO/BPO): substantial
Recognise BEST ESTIMATE to settle PO Executory costs:
CR < i/r = DISCOUNT diff bet renewal rental and expected fair rental →
+ factor in TVM Fixed → incl in lease pmts (LL)
reasonably certain will extend lease term/purchase
• Expected value Var → expensed as incurred (don’t incl)
Effective interest method: Lease pmts = Fixed + Var + guaranteed RV + bargain
• Midpoint in range (range of prices) Direct costs (incremental):
Discount/Premium on bond pay = Face value – PV of bond t purchase option
• Most likely outcome (lawsuits) [LESSEE] incl in ROU A; not in LL (pay to 3rd parties)
= 0 (what you actually get) Use: 1. Implicit i/r 2. Incremental borrowing rate
Extensive disclosure required. Guaranteed RV:
- Description, timing of outflow, uncertainty in If lesser than expected:
outflow, expected reimbursements
• Predict at start: incl add pmt into lease pmt [LESSOR] Operating: defer (amortise over lease term) |
DON’T record general risk contingencies.
• Realised term end: Dr RV loss on lease Finance: expense at pt/period of sale
Litigation: look @ → period of occurrence, prob of unfav
outcome, reasonable & reliable estimate of loss Sales leaseback
If unfiled → prob of filing & prob of unfav outcome (BOTH) SELLER = LESSEE (recognise gain/loss = FV - BV)
Dr Lawsuit loss Cr Lawsuit liability BUYER = LESSOR
*NOT PROBABLE = DON’T RECORD Successful sale: control passed to buyer (lessor) →
Dr Cash Cr Bond payable OPERATING lease (seller no more ctrl)
Warranty provisions: Dr Int exp Dr Bond pay Cr Cash - Seller derecog A + recog gain/loss (sell P/FV – BV)
Assurance: expensed @ pt. of sale Dr Int exp Cr Bond pay Cr Int pay (Accrual) - Dr Cash Dr Acc dep Cr Asset Cr Gain
MATCHING PRINCIPLE: expensed in SAME PERIOD as Bond issued bet int dates: - Lessee Dr ROU A Cr LL
revenue generated Bondholders pay from last pmt date to issue Failed sale: control still w seller → FINANCING
Dr warranty expense Cr Cash/Inv/Payroll Dr Cash Cr Int expense (prorate amt) Dr Cash Cr Note payable
Dr warranty expense Cr warranty liability Bond writer pay full pmt on nxt pmt date 1. Determine type of lease (fin/op)
Service type/Extended: Cr Unearned rev 2. Determine type of sale (success/fail)
Rec. on straight line basis/overtime
Warranty costs → expensed as incurred TAXES
*don’t need record estimated liability! Fin books: accrual basis | Tax code: cash basis
Consideration Payable Temp diff: appear in both books; reverses
Premiums, coupons, rebates → stimulate sales Perm diff: appear in one book; non
Costs expensed in period of sale LESSOR POV
Taxable (minus) /deductible (add back)
Premium expense = selling expense Classify: FINANCE (essentially a sale) or OPERATING
L = Estimated costs – costs of alr redeemed 1/5 + Non-cancellable = FINANCE lease
Deferred Tax Liability (DTL):
Environmental Provisions: legal obligation to return long live Extinguishment of NCL: 1. Transfer ownership test
Pre-tax book I > Taxable I
asset Reacq. P > NBV = Loss (paying more) 2. Purchase option test
Tax expense > Tax payable
Amt = BEST ESTIMATE of future costs (PV) Reacq. P < NBV = Gain (paying less) 3. Lease term (>75%)
Pay LESS tax today, MORE in future
Recog any gains & losses at the end - Bond must be amortised up to reacq date (similar 4. PV test (>90%) *don’t incl UGRV
DTL bal = future taxable I (temp diff)* tax rate
to dep.) 5. (no) Alternative use test
, Dr Tax exp Cr Tax pay Cr DTL *Liability → 16A-D → Equity
DTA & DTL → non-current on B/S - right to redeem bc of A. uncertain event Treasury shares: cannot rec gain/loss (embedded in equity)
Deferred Tax Asset (DTA): NET DTA = DTA – DTL | NET DTL = DTA – DTL occurred or B. death/retirement of holder | Set off amt → reduce credit exposure
Taxable I > Pre-tax book I issuer give prorated shares bc liquidation Conditions: 1. Legal enforceable right to set off
Tax payable > Tax expense *distribution = dividends (not finance costs) 2. settle on a net basis (realised A & settle L simultaneously)
Pay MORE tax today, LESS in future 3. Not puttable pref shares/bonds, rights, options,
Only record if probable to realise DTA (don’t overstate A) warrants, share options (fixed no. @ fixed P) Equity’s distributions/gain/loss/transn costs/changes in FV
Income tax expense = deferred + current
Dr Tax exp Dr DTA Cr Tax pay Obligation: Type: → WILL NEVER HIT P&L
Deferred tax exp = CHANGE in DTL/DTA (??)
If DTA not realisable (EV @ end of period) → Dr Tax exp Cr Goods + svcs Non-financial L
Net deferred tax exp = (DTA) + DTL
DTA Cash + Fin asset Financial L FA + ED Same as FA (ENTIRE). No split acct.
Change in tax rate → adjust in period of change (record adj Issue equity/own VAR no. → L FL + ED Split acct
Others:
in DTL) shares (VAR FOR VAR/VAR FOR
Pmts based on price index (VAR) → not incl in LL
FIXED/FIXED FOR VAR)
If pmt at 31 Dec → don’t have to accrue for int exp & liability
FIXED no. → E FIN FVTPL (except hedge acc)
Sales rev: PV of lease pmts (exclude RV) DERIVATIVE
(FIXED FOR FIXED)
Non-deriv contract:
BEG bal of LL & LR: (calc yrself) Fixed no. of shares Week 8:
LL (lessee) = PV of lease pmts + PV of $ owed under RV Dr Legal exp Cr Share capt FA FL
(expected – guaranteed RV) Deriv contract: AC FVOCI FVTPL AC FVTPL
LR = PV of lease pmts + PV of un/guaranteed RV Fixed no. of shares @ fixed
exercise P Financial derivatives: Forwards/Swaps/Futures/Options.
Expected RV < Guaranteed RV → lessee need pay lessor the Dr Cash Cr Reserve
Held for trading. @ FVTPL. (EXCEPT: hedge acc → FVOCI)
balance
Net operating loss (NOL): Ded. tax expense > Taxable rev Forwards Agreed rate on agreed i/r, fx
If is unguaranteed RV → lessor bear the loss amount @ specified
Carry forward: offset future tax
future date
@ Loss incurred → record benefits Historical eff rate = coupon rate OTC | Gross or Net basis
Dr DTA (benefits for future tax earnings) Mkt based borrowing rate = i/r → NDF
Cr Tax expense (loss c/f – CONTRA acc) Swaps Pays int @ pre-agreed i/r, fx, credit
Bonds: BA2+ END mode fixed rate to & receives default
Leases: depending on qn pay on 1Jan/31Dec int @ prevailing floating swaps, equity
rate swaps
Estimated redemptions – redemptions to date = remaining
redemptions (liabilities) No exchange of
@ Nxt yr → realises benefits
principal; same amt;
Dr Tax expense same currency
Cr DTA (reduce bal. to 0) Accrual of interest: Dr Int exp Dr Bond/Int payable Cr Cash
Futures Exchange i/r, fx,
Cr Tax payable Compound instruments: *SPLIT ACCT commodity
Week 7: Financial liability & equity Step 1 LIABILITY: Initial: PV (int + principal pmts); using EIR
Options i/r, fx, equity
Asset Liability b4 issue exp | Subsequent: AC options
FA: cash/equivalents, FL: contractual obligations Step 2 EQUITY: residual (Face val – FV(liability)) Value depends on underlying asset, no initial net
equity instrument held, to pay cash/exchange fin
Step 3 Allocate issue exp proportionately investment/smaller than required/settled at future date
contractual rights to items (DERIVS)
Step 4 Find EIR w expenses (FV: use bond faceval) - Underlying var: int/currency/price of
receive cash, contractual
rights to exchange fin stock/commodity/index/credit rating/non-fin var
items (DERIVS) Dr Cash Cr Bond pay Cr Capital reserve Favourable: FA | Unfavourable: FL
- Valued by Dr Bond pay Dr Capital reserve Cr Cash Hybrid: non-deriv host contract (FA/NFA/FL/NFL) + ED (>=1)
markets If FD contractually transferable independent of
NFA: inv, PPE, prepmts, NFL: unearned rev, Dr Cash Dr Unamortised disc Cr Bond pay Cr Capital reserve instrument/diff counterparty → separate FD (not ED)
patents, trademarks provisions
- Valued by Unamortised disc/prem = Face val of bond – Amortised costs
DTA = NOL * tax rate - tangible AKA carrying val of bond @end\
-
Deferred income tax benefit features = int exp – cash paid
Reduce net loss - Gearing ratios: debt ratio more intuitive (D/D+E) Early redemption of bond
-
Don’t recognise DTA if NOT probable & not Higher ratio/more leveraged → higher fin risk Step 1 Allocate cash paid (redemption expenses)
reliably estimated If L misclassified as E → ratio understated proportionately
Carry backward: c/b 2 yrs (earlier yr first) → receive Equity: Step 2 Rec gain/loss (L) → P&L Rec. of FA ACCOUNTING CHOICE:
refunds. c/f remaining. 1. Non-puttable ord shares Step 3 Rec gain/loss (E) → Equity 1. Trade date: date of contract (FV=0)
Dr Income tax refund rec. 2. Puttable fin item (meets req in 16A,B,C,D) *issue expenses and redemption expenses → PROPORTION
Cr Income tax expense (CONTRA acc)
